PHRM.L Regulatory News (PHRM)

28 June 2013
Phorm Corporation Limited ("Phorm" or the "Company")
Annual Report and Financial Statements -Year Ended 31 December 2012

Phorm (AIM: PHRM), the personalisation technology company, today announces its audited financial statements for the year ended 31 December 2012.

Highlights:

·; Total revenue of US$63,291 including first revenues from Turkey (2011 - US$50,419).

·; Operating losses US$31,582,656 (excluding share based payments) (2011: US$24,196,513).

·; Regulatory clarity obtained in Turkey with improved opt-in process.

·; Commercial momentum building, large-scale commercial partnerships established with Turkish publishers and advertisers.

·; Advertising performance very encouraging.

·; Deployment in China in final stages of testing.

·; Business development accelerating in other Chinese provinces.

·; Placings of US$20.6m (net US$19.4m) successfully completed.

Year to date 2013

Turkey

·; Improved opt-in process developed, following the BTK guidelines issued in December.

·; New invitations issued from May 2013; very positive results, in line with expectations.

·; Invitation momentum building, over 350 websites have now served invitations.

·; Commercial progress is accelerating, the Company has served over 200 million advertisements across over 100 sites.

·; Advertising performance is very encouraging and there are many ways to further improve results.

·; Revenue per user is increasing rapidly.

Rest of World

·; The first Chinese ISP signed to the Phorm service is nearing completion of the testing phase.

·; The company has reduced its operations in Brazil due to the time it has taken to move beyond the initial deployment.

·; In Romania, the Company is continuing to work with its commercial partners and the regulator and expects to begin commercial operations in due course.

Finances

·; In 2012, the company completed placings of US$20.6m (net US$19.4m), which enabled the business to launch its commercial operations in Turkey and to continue to develop opportunities in China and elsewhere.

·; In March 2013, the company completed the placing of £3m of Loan Notes, with £1.5m made immediately available to the company as bridge financing. The Loan Notes were subsequently repaid in full with interest as a result of a placing of £5.2m in shares and the issuance of a further £2.0m in convertible secured loan notes.

Enquiries:

Phorm Corporation Limited
Andy Croxson: +44 20 7297 2326 (analysts and investors)

Liberum Capital +44 20 3100 2222(Nominated Advisor and Joint Broker)Chris Bowman
Richard Bootle

Mirabaud Securities LLP +44 20 7321 2508(Joint Broker)
Jason Woollard
Peter Krens

Chief executive's statement

Operational performance

After a very long road to revenue the company is finally on track to demonstrate the potential for its model to generate large-scale revenue. However, that path has not been without challenges.

The company's partnership with TTNET means that Phorm operates within a regulated environment unlike any other internet advertising company in Turkey. As a result, the specific method by which the company has issued invitations has been subject to regulatory review. This review has caused significant delay.

The delay extended the timeline to revenue and meant that the company has had to raise more capital to fund operations. A positive effect of the review was to bring regulatory clarity; clearing the path for operations in Turkey and setting the gold standard for others to follow i.e. fully opt-in and providing users with a clear informed choice. In addition, the service, known as Gezinti in Turkey, protects the anonymity of users as no personally identifiable information is required and all users are able to opt out at any time.

In May, 2013, following the BTK ruling, TTNET officially launched the new invitation method and the Gezinti business. The press launch was well received with national coverage.

The drivers of the business are now well understood: they are users, publishers, advertisers and advertisement performance. We have served over 200 million advertisements across over 100 sites and are continuing to build momentum.

1. Users

These are users within the TTNET base who have explicitly opted-in to the proposition after being presented with an invitation through a partner website. The new invitation model has proven to be extremely successful and more than 350 sites are now participating. The company has been growing its base rapidly and now has millions of monthly unique users.

2. Publishers

These are the websites, which provide the company with the advertising inventory on which to show advertisements. We have simultaneously been working with the large publishers, advertising networks as well as smaller publishers. As we have demonstrated the ability to increase revenue on web sites, the level of participation has grown. We have received 2 billion advertising requests per month across 385 websites for text advertising alone.

3. Advertisers

We have focused primarily at this stage on the text advertising market since this represents more than half of the Turkish online advertising market, and is the sector most focused on performance and therefore most likely to rapidly recognise the value of the company's offering.

Following a number of advertising tests which have demonstrated the effectiveness of our solution, the number of campaigns running has grown to the point where we are currently running 25 campaigns, a weekly increase of 78% on the previous week.

In addition to working through existing sales forces and agencies, we initiated a sales programme to reach the many SMEs in Turkey whose current options for online advertising are limited.

4. Performance

The unprecedented level of targeting that our advertising platform provides creates a step-change in terms of performance compared to traditional forms of online advertising. There are, however, many different ways in which further performance improvements can be made through advertising formats, targeting rules, software improvements and general process changes will be a continuing area of focus for the business. We have seen a steady improvement in the performance of our advertising since the launch of our text product and revenue per user has increased by 43% in the last 4 weeks.

Other markets and business development

The company recently announced that it has signed agreements with ISPs in 3 major Chinese provinces. The company has received a great deal of interest from other provinces and is accelerating its business development efforts. The first ISP to be signed has installed all the necessary equipment to launch Phorm's service and is nearing the ending of the testing phase. The company looks forward to updating the market about the exciting developments in China in due course.

The significant restructuring measures that the company has introduced has resulted in the company focusing on those markets where commercial traction can be achieved quickly. As a result the company has deprioritised its operations in Brazil due to the time it has taken to move beyond the initial deployment, despite the excellent results in terms of advertising performance. In Romania, the Company is continuing to work with its commercial partners and the regulator and expects to begin commercial operations in due course.

The company also continues to develop a number of opportunities in select markets globally and is prioritising only those markets that can deliver results quickly.

Re-domicile

In June 2012, the company announced its intention to redomicile to Singapore. This process was completed successfully in August 2012 and ensured that the listed entity no longer falls under the US Securities Act, which required physical certificated settlement of our shares which made trading in the shares more cumbersome than that of other shares. By redomiciling to Singapore physical certificated settlement is no longer required and the company has been able to fulfil shareholders' requests to dematerialise their shares to allow trading on CREST. The removal of the need to physically settle the shares in this way has improved liquidity.

Funding and going concern

In 2012, the company announced placings of US$21.0m, which enabled the business to launch its commercial operations in Turkey and to continue to develop opportunities in China and elsewhere. However, the re-design of the invitation process led to a delay in the commercialisation of the Turkish opportunity and, as a result, further fund raising was required.

In March 2013, the company announced the placing of £3m of Loan Notes, with £1.5m made immediately available to the company as bridge financing. The Loan Notes were subsequently repaid in full with interest as a result of a placing of £5.2m in shares and the issuance of a further £2.0m in convertible secured loan notes.

As a result of the extended delays involved in reaching the current operational stage, the company has seen a substantial decrease in its stock price. It has nevertheless retained the support of key shareholders who currently account for more than 60% of the company's shareholding.

The delays described above have meant that revenues have not grown as rapidly as expected. The company is very encouraged by the progress made but, nevertheless, further funds will be required in the near term. The business plan approved by the Directors forecasts the need for this further funding and access to sufficient working capital to allow the operating businesses to reach full commercial scale. This is the principal risk to the business at the current time.

At the date of approval of these financial statements, the Group has yet to secure the additional funding requirements set out in the business plan and is, therefore, not fully-funded at the current time. The Group requires additional funding in the near term to meet its liabilities as they fall due and is in discussions with a number of parties regarding funding. Discussions have been progressing positively on a number of fronts, and the Group expects to be able to make an announcement with respect to further funding shortly.

In preparing these financial statements, the Directors have assumed that sufficient further funding will be made available to the Group to enable it to execute its business plan and realise the forecast inflows from operations in Turkey and elsewhere.

In common with similar businesses at this stage of their development, and in light of the Group's dependence on further financing being made available to it from its shareholders or other providers of finance, the Directors consider the combination of these circumstances represent a material uncertainty that may cast significant doubt upon the Group's ability to continue as a going concern and, therefore, that it may be unable to realize its assets and discharge its liabilities in the normal course of business.

Nevertheless, after making enquiries, and considering the uncertainties described above, the directors have a reasonable expectation that the Group will have access to adequate resources to continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis in preparing the financial statements.

Further information in respect of the directors' assessment of going concern, including the material uncertainties identified, is set out in Note 1 in this announcement.

Financial report

Results for the year

The Company is pleased to be able to report that it started generating revenue in Turkey in 2012. This revenue generation took significantly longer than originally anticipated and was interrupted as a result of the adjustments made to the invitation process in line with the new BTK guidelines. Following the regulatory review, revenue generation restarted in May 2013. While the current revenues remain very small, key lead indicators such as the number of pages enabled for advertising, as well as the number and value of campaigns show strong positive trends. The Company is continuing to build its user base and is very pleased with the opt-in rate that it has for its invitations. The lead indicators give strong grounds for optimism with respect to the Company's future potential.

Total revenue of $63,291 was generated for the year ended 31 December 2012 (2011: $50,419). The Group expects revenue growth to be driven by a combination of four key factors: users, publishers, advertisers and advertisement performance.

Operating losses for the year (before non-cash share-based payment charges) were $31.6 million (2011: $24.2 million). The non-cash share-based payment charges for the year were $26.1 million (2011: $6.3 million).

For the six months ended 30 June 2012, we reported an operating loss (before non-cash share-based payment charges) of $14.8 million; this compares to $16.8 million in the second half of the year. The restructuring announced previously involved the reduction of headcount in Brazil, Singapore and the UK. The business is expected to result in significant cost savings and the business will continue to focus on identifying cost savings and efficiencies as it continues to scale its operations and revenues.

Losses after taxation were $58.1 million (2011: $62.5 million). Loss per share was $0.74 (2011: $2.36).

The Group used $30.6 million (2011: $24.3 million) in funding its operating activities.

Financial position

Our balance sheet at 31 December 2012 showed net assets of $6.4 million (2011: net assets of $18.2 million) with cash and cash equivalents of $5.9 million (2011: $16.1 million). The year on year movement of $11.8 million is attributable to the loss for the year of $58.1 million, foreign exchange gains on translation of overseas subsidiaries of $0.6 million, offset by new share subscriptions of $19.4 million, a share-based payment of $26.1 million and the effect of the redomicile $0.2 million.

Funding

In June 2012 the company announced that it had entered into agreements to raise £20 million via subscription for a 20% equity stake in an operating subsidiary for Hong Kong and the People's Republic of China. Unfortunately, however, due to problems unrelated to Phorm with one of the parties involved in the transaction the funding did not take place. As a result, in August 2012 the company raised US$11.0 million and subsequently in November 2012 raised a further US$10.0 million through two share placings.

In March 2013, the company announced the placing of £3m of Loan Notes with an initial annualised coupon of 20% payable upon redemption. The funding was to take place in two tranches with £1.5m being made immediately available to the company as bridge financing.

In April 2013, the company announced that it had successfully completed a placing of £5.2m in shares and the issuance of a further £2.0m in convertible secured loan notes. The company further announced in May 2013 that it had redeemed the £1.5m of convertible loan notes issued in March 2013, cancelling all further obligations.

In June 2013, the company entered into discussions with its investors to provide further funding of £8.0 -10.0m the Board is confident that these discussions will conclude successfully in the near term but has yet to receive binding commitments.

The proceeds of the fund raising activities were used for business expansion, capital expenditures, marketing and general working capital for the business.

Kent Ertugrul

28 June 2013

Consolidated income statementYear ended 31 June 2012

Consolidated statement of comprehensive incomeYear ended 31 December 2012

Consolidated statement of changes in equityYear ended 31 December 2012

Consolidated statement of changes in equityYear ended 31 December 2011

Consolidated balance sheet31 December 2012

Consolidated cash flow31 December 2012

On 11th September 2012 Phorm Corporation acquired Phorm Inc. for a non cash share for share exchange.

Notes to the consolidated financial statementsYear ended 31 December 2012

Basis of preparation

The preliminary announcement for the year ended 31 December 2012 is an abridged statement of the full annual report which was approved by the Board of Directors on 28 June 2012. While the financial information included in this preliminary announcement has been prepared in accordance with the recognition and measurement criteria of International Financial Reporting Standards ("IFRS"), International Accounting Standards ("IAS") and Interpretations issued by the International Accounting Standards Board ("Interpretations"), as adopted by the EU), this announcement does not itself contain sufficient information to comply with IFRSs. The Company will publish full financial statements that comply with IFRSs on 28 June 2012.

The consolidated financial statements for the year ended 31 December 2012 have been prepared on a going concern basis. The director's assessment of the appropriateness of the going concern basis is set out below.

The auditors' report on the consolidated financial statements for the year ended 31 December 2012 is unmodified but includes reference to matters to which the auditors draw attention by way of emphasis, without modifying their report, in respect of a material uncertainty with respect to going concern. Further information in respect of the material uncertainty is set out in note 2 below.

Going concern

In accordance with their responsibilities, the directors have considered the appropriateness of the going concern basis, which has been used in the preparation of these financial statements.

During 2012 and up to the date of approval of these financial statements, the Group has made significant progress in the development and deployment of its technology and services. In particular, the generation of revenues in Brazil, and the operational launch in Romania and Turkey represent important commercial developments for the Group. The Directors recognise the fact that revenues have not grown as rapidly as originally expected due to slower than expected user growth in Brazil and the delays experienced in Turkey. However, the Directors are very encouraged by the speed of the deployment in both Romania and Turkey and the commercialization of operations in Turkey market which gives reasons for confidence with respect to future cash flows.

The Directors have increased confidence in the Group's ability to generate substantial revenues given the commercial momentum developing in Turkey.

To date, the Group has incurred cumulative losses of $220.6 million. The Group has funded these losses and its operations through equity provided by its shareholders, including the equity issuance of $19.3 million, net of issue costs in August and November 2012, which was used to repay the Group's secured convertible loan notes and provide working capital for the Group.

The Directors have approved a business plan which forecasts continuing cash outflows in the near term. The Group, however, has forecast revenues for FY13 and FY14 sufficient to cover the operating costs in Turkey and China and to provide significant cash flows for the Group to fund other costs incurred as it seeks to achieve further deployments internationally. These forecasts include a number of key assumptions which have been validated through our market trials but have yet to be confirmed at scale.

The principal risk with respect to achieving the results anticipated by the business model is the speed of roll-out of the service in each of its operational markets.

In the near term, the principal risk to the business is to ensure that the Group has sufficient working capital to allow the operating businesses to reach full commercial scale. At this scale, the Group's forecast shows that the business would be generating significant operating profits. At the date of approval of these financial statements, the Group has yet to secure the additional funding requirements set out in the business plan and is, therefore, not fully-funded at the current time.

The Group's strategy is to pursue a number of financing alternatives in parallel to ensure that it has sufficient funds to sustain operations. In June 2013, the company entered into discussions with its investors to provide further funding of £8.0 -10.0m. The Board is confident that these discussions will conclude successfully in the near term and expects to be able to make an announcement with respect to further funding shortly.

In preparing these financial statements, the Directors have assumed that sufficient further funding will be made available to the Group to enable it to execute its business plan and realise the forecast inflows following commercial launch and roll-out of its technology in additional markets.

In making this going concern assessment, the Directors have had regard to the following matters:

·; the Group's track record of successful fund raising from shareholders and other investors, as evidenced in 2008, 2009, 2010, 2011, 2012 and 2013;

·; the potential to secure revenue commitments from new ISP partners;

·; the potential opportunity to raise further finance in local markets; and

·; the commercial progress being made internationally.

In common with similar businesses at this stage of their development, and in light of the Group's dependence on further financing being made available to it from its shareholders or other providers of finance, the Directors consider the combination of these circumstances represent a material uncertainty that may cast significant doubt upon the Group's ability to continue as a going concern and, therefore, that it may be unable to realize its assets and discharge its liabilities in the normal course of business.

Nevertheless, after making enquiries, and considering the uncertainties described above, the directors have a reasonable expectation that the Group will have access to adequate resources to continue in operational existence for the foreseeable future. For these reasons, they continue to adopt the going concern basis in preparing the financial statements.

The financial statements do not reflect any adjustments that would be required if the Group were unable to secure such financing to enable the Group to achieve profitability and positive cash flow, such that the going concern basis of preparation ceases to be appropriate.

-ends-